Nonprofit Financial Statements Are Different


Nonprofits are different animals when it comes to financial reporting. Even though they are not interested in generating profits, their accountants still prepare financial statements for internal and external users. The traditional set of financial statements contains the following: Statement of Position, Statement of Activities and the Statement of Cash Flows.

Statement of Financial Position

This statement is similar to the for-profit Balance Sheet. It lists cash, accounts receivable, payable, inventories and “net assets.” Since a nonprofit doesn’t really have owners, this statement doesn’t show ” Equity” or “Retained Earnings”. Instead, net assets are presented, accumulating financial changes over the years.

This report presents numbers reflecting what the nonprofit owns, owes and an overall view of resources to allow for growth. If you review this statement and see $100 in cash, no receivables and $10,000 in liabilities, you may become worried about the nonprofit’s ability to survive and pay its bills.

The Statement of Financial Position follows the formula: Assets = Liabilities + Net Assets

Statement of Activities

The Statement of Activities is similar to the for-profit Income Statement. It presents revenues and expenses, which are often summarized by the areas of programs, administration and fundraising.

This statement often has multiple columns to present the numbers by the type of net asset, such as “Unrestricted,” “Temporarily Restricted” and “Permanently Restricted.”  In the future, 2018, you may start seeing financial reports showing only two net assets– “Unrestricted” and “Restricted.” When a nonprofit receives $100 to be used for general operations, it will show up under the unrestricted column. On the other hand, if the $100 is given with restrictions as to its use, it will show up under the other columns.

The Statement of Activities follows the formula: Revenues – Expenses = Changes in Net Assets+ Beginning Balance Net Assets= Ending Net Asset Balance.

Statement of Cash Flows

This statement is very similar to its counterpart in the for-profit world. The idea is to show summarized cash movements. Revenues that are temporarily restricted, like $10,000 to be used in a new program starting in the future, are classified as financing activities in this statement.

The Statement of Cash Flows follows the formula: Cash flows from operating activities + Cash flows from investing activities + Cash flows from financing activities= Net increase in cash and cash equivalents. A reconciliation between cash balances and change in net assets is often shown as well.

Note that when a nonprofit is a voluntary health and welfare organization, it’s required to issue a fourth, matrix-like report, ” Statement of Functional Expenses” that shows individual expenses, such as rent or postage, classified by the three areas of programs, administration and fundraising. This statement is unique to non-profits with no real counterpart in the for-profit sector.  Starting in 2018, more nonprofits will be required to prepare this statement, so watch out for it.

MCheck out the book “Nonprofit Finance: A Practical Guide- Second Edition “– First edition was nominated for the 2016 McAdam Book Award

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s